How the next housing bust will be different

Based on the moral hazard from lessons learned from the last housing bust, future housing declines will experience very, very low sales volumes.

What lesson did lenders learn from the painful losses from the housing bust?

Did they learn they shouldn’t peddle toxic mortgages? Nope.

Did they learn they shouldn’t give loans to unqualified borrowers? Nope.

What they learned is that no matter how foolishly irresponsible their lending gets, they will get bailed out by government cash and federal reserve interest-rate policy, and they can avoid mortgage default losses by loan modification can-kicking until prices rebound. As long as they don’t foreclose and resell for a loss, they can amend-extend-pretend their way out of any lending disaster.

That’s really what lenders learned.

Do you see the potential moral hazard? Since they refused to learn the lessons they should have, and since they learned they can take on unlimited risk with little or no consequence for the future, wouldn’t it be logical to assume that if given the chance, they will return to irresponsible lending to generate short-term gains through fee income?

As long as this moral hazard exists, only vigilant enforcement of regulations will prevent another housing bubble, but how long will that last? How long before regulators are captured by banking interests and a new Ponzi loan virus is released to the market? Five years? Ten years?

If we do have another housing bust, what will it be like?

Low volume followed by even lower volume

The 2014 housing market shows what happens when prudent lending standards are applied to an overheated housing market: sales volumes drop. In 2012 and 2013, the housing market rose about 20% in a 15-month stretch until an interest-rate spike in June 2013 brought down the affordaibility ceiling and stopped the rally dead. Over the last 15 months, the market has flatlined because buyers can’t raise their bids any further with their stagnant incomes, and slow employment gains creates few potential new buyers to keep volumes up. In the past, flat pricing and low sales volumes would have been overcome with affordability products, but with most of these toxic loans banned today, the market goes nowhere.

In a typical housing bust (California has endured three such busts, so we know what typical is), once sales volumes drop, sellers come to realize buyers can’t raise their bids because affordability products abruptly disappeared in a credit crunch. Since much of the inventory used to be must-sell, sellers were forced to lower their price to meet the market bid; thus house prices fell. Depending on the terms of the toxic loans, prices at the peak may be only a little elevated, or they may be extremely elevated.

For example, in the late 1980s and early 90s, that housing bubble was characterized by many conventional mortgages with excessive DTIs, and a moderate sprinkling of interest-only loans, so when lending collapsed back to prudent standards, the aggregate loan balances didn’t drop very much, so the market didn’t have as far to fall to reach stability.

However, the Great Housing Bubble witnessed the proliferation of Option ARMs, which elevated house prices 30% or more above stable price levels. When Option ARMs disappeared, aggregate mortgage balances plummeted, and even the added boost of cutting mortgage rates in half couldn’t make up the difference (see below).

When mortgage balances contracted in the credit crunch of the Great Housing Bubble, lenders also followed their standard loss mitigation procedures, which were to foreclose and resell the REO as quickly as possible. Since there were so many REO, this caused house prices to drop quickly and significantly back to stable levels determined by income and mortgage rates. This quick decline caused by REO sales is also what kept sales volumes up. Imagine what would have happened if lenders kicked the can from the beginning.

The next housing bust will likely see the same credit crunch induced collapse of aggregate mortgage balances, particularly if lenders are emboldened by moral hazard to develop and proliferate another Ponzi loan like the Option ARM. If that happens again, and if lenders use their “new and improved” loss mitigation procedures, when sales volumes decline due to the credit crunch, rather than signal an upcoming decline in prices, it will signal even further declines in sales volumes. In fact, if we do see another housing bust, I predict we will see sales volumes fall to lows never before measured, even lower than the worst sales years of the most recent housing bust.

Why will sales volumes fall so low? If sellers are trapped in cloud inventory, unwilling and unable to lower price, and if buyers are abruptly limited by lower borrowing power, financed buyers simply won’t be able to transact, no matter how much they substitute down in quality. If financed buyers can’t buy, sales volumes will crater — prices won’t go down much, which is what lenders are after — but sales volumes will necessarily suffer. That’s how I believe the next housing bust will turn out.

Federal tax data shows California is the second-best state in terms of keeping its taxpayers when the state’s huge population and its massive economy are taken into account.

I loaded some fresh IRS statistics about the 2015 filing season (latest available) into my trusty spreadsheet to see if the tax agency’s migration statistics would tell us the same story that census data did: Claims that Californians are departing in relatively huge numbers are totally overblown.

What I found confirms some earlier research I did with census data, which shows proportionally few Californians are leaving for elsewhere in the nation.

Now, IRS data isn’t perfect. It tracks those who filed federal returns, so it misses those who don’t file — a group that includes the youngest and oldest people, poorer folks and undocumented workers. It also captures a financial snapshot of the year after any relocation. Still, it’s a tally of a valuable commodity: folks with taxable income.

California’s population grows primarily through births and foreign immigrants. And that growth is stymied a bit by various headaches and challenges that nudge some people to leave. But moving is part of life. And if you believe that California should work harder to keep its residents, you should study examples of places with better track records of retaining population.

A great employer typically has a high level of long-time employees. Top retailers have a huge flock of repeat customers. And California has a low rate of folks moving to other states.

Who’s leaving?

IRS data for 2015 shows 207,861 tax filers — a good estimate of households — from other states lived in California the year before. We may miss those old relatives or friends, but they add up to only 1.48 percent of 14 million California filings. Only Michigan had a lower exits-to-population ratio.

California’s departure rate is far less than the national norm, which shows movers between states account for 2.14 percent of all U.S. filers. States that did a poor job at keeping its taxpayers included Utah (losing 2.33 percent of its filers); Arizona (2.72 percent); and Nevada (3.32 percent). These Western states, frequently cited as popular places for ex-Californians, have out-migration challenges, too.

Depending on who you talk to, rent control either always works or it never works. It’s the answer to the housing affordability crisis. It’s the reason that homes are so expensive. It will deter developers from creating more housing stock. It will keep people in their homes. It has never solved a city’s problems. It’s the answer to residents’ prayers.

Although Silicon Valley communities have either resisted or been slow to develop new housing to accommodate the influx of workers the region has attracted over the years, Sunnyvale has one of the strongest track records in California when it comes to building affordable housing. About 10% of the units in its development pipeline are affordable housing units.

But it’s also one of the few cities in Silicon Valley that doesn’t have rent control, either citywide or specifically for mobile home parks, and its City Council has shown a reluctance to entertain the thorny issue.

“The problem I have is there are a lot of loopholes in rent control, and we’re going to have a lot of lawsuits the moment it goes through,” council member Michael Goldman said in an interview with The Times.

The neighboring city of Mountain View, which passed a voter-approved measure in November, was slapped with a lawsuit from the California Apartment Assn. seeking to block the measure from being enforced immediately after the election. A Santa Clara County judge in April denied the request for an injunction, clearing the way for the city to go ahead with its rent control rollout.

“This is a free country and anybody with a filing fee can file a lawsuit,” said Brodie, the attorney who helped Mountain View get rent control. “If we allow that to prevent us from making good policy, that’s just not reasonable.”

For housing advocates, rent control is good policy. For opponents, it’s a Band-Aid solution. Rents are high, they argue, not just because landlords can charge whatever they want, but because Silicon Valley became a global tech mecca faster than its cities could handle it. How do you solve that?

SEATTLE – Living the American Dream in the Puget Sound will cost you big bucks. That’s why the perfect house with the white picket fence is an unrealistic dream for many people searching for housing especially in Seattle.

According to the Northwest MLS, between 2011 and 2016, home prices in Pierce County rose 29%. Prices rose 38% in Snohomish County and 38% in King County. In 2011, the median home price was $340,000, but it jumped to $548,000 in 2016.

cobuy neighborhood.JPG

Experts say those soaring prices are why we’re starting to see a growing trend of unmarried couples buying homes together. It’s called co-buying.

This isn’t about love or romance but all about finances. Relatives, friends, or groups of people are now deciding to buy a property together largely because they can’t afford a space on their own.

Stats from Zillow show people aren’t waiting for marriage to get a mortgage. In Seattle, young unmarried couples buying homes together jumped to 14% in the last nine years. At the same time, single people buying homes alone dropped three percent.

cobuy familyIt’s dinner time at the Neufeld house in Lake City. Their new construction homes offers top-notch amenities. The journey there started ten years ago when the Neufelds moved to Seattle from Winnipeg with an idea for community on a budget. Shortly after, they met the Linds.

“We were here for about a year in conversation with them and others living together with other unrelated adults,” said Jonathan Neufeld.

This is pretty typical when a cycle is nearing its peak. People that are priced out start thinking creatively and decide to go in with a friend or relative to purchase a place. Lots of people did this from 2003-2005. I even considered it with a roommate back then, but in hindsight, it would have been a terrible decision.

A record number of young people are living at home with mom and dad in California even in the midst of a very low unemployment rate and record in the stock market. Millennials in particular are carrying large levels of debt and many are still struggling to get out into a rental, let alone purchasing a home. There is a housing apocalypse for young Americans and in California, many Millennials are simply waiting until their baby boomer parents kick the bucket so they can own a piece of the California Dream. But Taco Tuesday baby boomers are not going away and many are angry that their offspring are unable to buy a home like they did when housing wasn’t consumed by house horny buyers and prices were actually affordable. The numbers are startling because when we brought attention to the issue a few years ago the number was at 2.3 million young adults living at home. Today it is now up to 3.6 million – if we combined these people it would be the third largest city in the U.S.

Young and living at home

There was this “fake news” narrative that many young Americans would be the second wind that would keep the housing market going strong. That never materialized. What did happen is that you had investors, foreign money, and wealthier older households buying the slim inventory available in the market. In California where rent prices are high and housing prices on crap shacks are insane, many are simply living at home.

And yes, this time it is different when it comes to young people living at home:

David Stockman joined Fox Business and Maria Bartiromo on Mornings with Maria to discuss President Trump’s tax plan efforts and what he viewed as a massive calamity unfolding in Washington.

The Fox Business host began the conversation by asking what he thought on the Trump tax plan proposal. Stockman pressed, “I think it is a one page, $7.5 trillion wish list that has no chance of being enacted and is pretty irresponsible this late in the game.” The host then fired back by asking how the former Reagan budget director placed a price tag on the plan without a score from the Congressional Budget Office.

The author fired back, “The corporate is at 15%, the pass through rate on all unincorporated business is at 15% and that will cost roughly $4 trillion. Doubling the standard deduction will cost over $1 trillion. Getting rid of the alternative minimum will cost nearly $1 trillion.”

Trump’s Tax Plan And Congress in 2017

Then when referencing the Committee for a Responsible Federal Budget (which Stockman is a Board Member of) the author highlighted, “The gross cost is $7.5 trillion and that perhaps the government could earn back $2 trillion through loophole closing and base broadening. My argument is, after ruling out charitable contributions, home mortgages and a Congress that says they won’t touch a health care exclusion… when you go through the math there is no $2 trillion that this Congress and Republican party will even remotely be able to put together.”

When asked about the assumption from Treasury Secretary Mnuchin and Senior Economic Advisor Cohn that new economic growth would pay for the budget Stockman pressed on the facts as he saw them. “Growth always helps, but what they’re failing to realize, and what I learned in the 1980’s is that there is more growth built into the baseline forecast from the CBO than you’re ever going to achieve in the real world.”

“This rosy scenario, which is the current ten-year baseline, assumes 30% more nominal GDP and wage growth per year than we’ve actually had in the past ten years.”

When asked about the conditions in Congress and how else the government could raise revenue he directed, “We have to look at the numbers. There’s $10 trillion of new deficits built in over the next ten years, within the current policy, with rosy scenario economics. If you are going to try to push $2-$6 billion in tax cuts on top of that with $1 trillion of defense increases, $1 trillion for infrastructure in addition to Veteran spending and more – we’re headed for a fiscal calamity. That’s why they can’t pass a ten-year budget resolution that you have to have to get reconciliation for. Without reconciliation there is no tax bill and without that Wall Street is stranded high and dry.”

This shows a total of only 90 foreclosures for sale (the red dots) across all of OC, LA, SB, Riverside, and Ventura.

The rest of the blue dots are highly questionable. It looks like they are including any property that has ever had a NOD filed. Many of them are no longer in default and have been sold on the MLS prior to foreclosure. For instance, the very first property featured on the right: 1272 S Arizona Ave,Los Angeles, CA sold on November 8, 2016. The second property 1655 Hastings Heights Ln Pasadena, CA 91107 sold on December 22, 2016. The third property 755 Manecita Cir, Perris, CA 92571 sold on May 5, 2017.